Scotland’s pension system would benefit from being tailored specifically to the needs of pensioners in Scotland. While there is a divergence in public policy and health outcomes, it makes sense for decisions on pensions to be taken alongside those on health, social care and local government service provision.

Recent announcements have highlighted the Scottish Government’s plan to set up a commission into an independent pension system – with the possibility of an earlier retirement age. However, the opportunities for pensions in Scotland go far beyond this. There is an opportunity to guarantee an affordable pensions system for the future and provide security in old age where Westminster has failed.

The need for independent policy

‘Pensions in an Independent Scotland’, published today, sets out the arrangements for state, private and public sector pensions following independence. The paper raises concerns over plans to raise the UK state pension age to 67. Life expectancy remains lower for both men and women in Scotland than the UK average which means that the average number of years spent in receipt of the state pension is lower in Scotland than the UK average. While this remains the case, a ‘one-size fits all’ pensions policy with a higher retirement age would disproportionately harm pensioners in Scotland.

Fortunately, there is a growing consensus that an independent pensions policy for Scotland in both preferable and affordable. Polling finds that people in Scotland trust Holyrood with control over pensions policy more than Westminster and would prefer for governments elected in Scotland to make future policy decisions. The economic evidence also provides a strong foundation for a successful Scottish pensions system. Overall public spending on pensions in Scotland has accounted for a lower share of the economy than it has across the UK in each of the last 5 years. Scotland fiscal position also remains in a position of relative surplus in comparison to the UK as a whole.

Pensions, of course, come in many forms. The basic state pension is funded through national taxation. Public sector pensions are currently provided by both the Westminster and Scottish Governments. Following a ‘Yes’ vote, the Scottish Government would extend its area of responsibility, as set out in this ICAS report. Company and private pensions would be largely unaffected by Scotland becoming an independent country, especially as cross border arrangements are common within the EU common market. There were 84 cases of Institutions for Occupational Retirement Provision (IORPs) as of June 2012. These include many instance of UK cross border cooperation on pensions with other independent countries, regulated by EU Directive 2003/41/EC. It is currently proposed that a transition period is established, following a ‘Yes’ vote, to ensure that all pensions liabilities are transferred smoothly and securely.

UK pension problems

While Scotland already has competency over many public sector pensions through the Scottish Pensions Public Agency, it is control over the basic state pension and the ability to provide proper incentives for private pension investment that is crucial to providing security in old age. In both areas Westminster has a record of failure. The black hole created by Westminster in company private pension pots recently reached an all time high of £312 billion pounds, according to figures from the Pension Protection Fund. This represents a catastrophic shortfall in Westminster’s support for the national pension system. Similar to the UK’s ballooning national debt, it is Westminster that is failing to pay its way.

Poor planning on investment has been matched by shoddy levels of provision for the most vulnerable. Pensions expert Dr Ros Altmann, of Saga, said: ‘Britain’s state pensions system is a disgrace – the meanest and most complex in the developed world. We have moved from a system which was the envy of the world to one which is falling apart.’

National Association of Pension Funds have long criticised the inequity and lack of provision for pensioners in the UK. On their figures, the UK’s state pension is one of the lowest in the OECD. In 2010, a median earner could expect a 37% replacement rate from the state pension compared to the OECD average of 60%. Almost half of all pensioners (45%) rely on means tested benefits in their retirement. This has led to a sickening sight in a civilised and wealthy society: pensioners who face a choice between eating and heating their homes.

The OECD Pensions document ‘Pensions at a Glance‘ confirms the shortcomings of the UK pensions system. The UK spent 5.4% of its GDP on pensions as of the latest OECD figures, which is lower than the average of 7%. 10.3% of UK over 65s are considered to be living in poverty. This is higher than in Austria, Canada, Denmark, France, Germany, Iceland, Luxembourg, Norway, Poland and Sweden. The Netherlands and New Zealand have almost eradicated pensioner poverty on a relative scale with only 2.1% and 1.5% of over 65s falling below the poverty threshold.

How can so many other developed countries provide more substantial support for pensioners than Westminster?

Conclusion

For Scotland, there is an urgent need to take control of pensions policy to rectify these shortcomings; and learn from more successful pensions models. With Scotland’s fiscal position, there is a strong and sustainable foundation to build upon. But the opportunities and challenges of an independent pensions policy go far beyond providing continuity.

Scotland can use the strength and wealth of its key business sectors to improve private pension provision. Scotland can use its wealth and resources to provide security in old age through a more generous state pension. Such policies are the mark of a civilised society. This can be achieved if we have the ambition to build an independent country where our pensions system meets the needs of the pensioners of Scotland.

Michael is Head of Research with Business for Scotland.
A graduate from the University of Glasgow, he has carried out a series of interviews with academics, politicians and the public in Denmark, Iceland and Ireland. Michael's on twitter @GrayInGlasgow.

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Comments (2)

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A continuation of the existing pension provision paradigm is not the best option for an independent Scotland, despite the potential that unarguably exists to improve matters to a limited degree whilst staying within this paradigm. The Scottish Governments Pensions Paper certainly contains proposals that will improve upon existing arrangements within the UK but it still leaves several major problems unsolved.
Truly transformative change IS possible but it requires a completely new paradigm and that is the one outlined in my article “Pensions, Investment & Building a New Scotland”. I would welcome your comments on that proposal Michael.